Current Yield

Zero Interest in Bonds

The holiday week failed to lift market sentiment as risk assets groaned again following weak U.S. jobs data. More stimulus from foreign central banks left investors uninspired and edgy. Safe-harbor bonds had more positive results.

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Neither a holiday week nor some formidable central-bank stimulus measures could lift market spirits, mired as they are in this seemingly endless era of slow economic growth and disappointing data.

Beleaguered risk assets groaned anew Friday as the Labor Department's nonfarm payrolls report showed the U.S. economy adding just 80,000 new jobs in June, short of the 100,000 consensus of economists' expectations. Unemployment held steady at 8.2%.

Even the now-customary counterintuitive rally reflex—when bad news boosts risky assets by inspiring hope of new Fed intervention—failed to bail out markets Friday. And why should anyone really still look to the Fed at this point? A day earlier, the European Central Bank and the People's Bank of China both cut key lending rates, while the Bank of England increased its bond-buying stimulus program. That kind of combined central-bank firepower once might have ignited a sustained rally. Instead, global stock markets finished Thursday essentially flat, and then fell Friday.

As usual, peripheral Europe was there to further undermine confidence. Spanish 10-year bond yields rose above the key 7% mark again, and yields on equivalent Italian bonds rose above 6%, as the latest round of euro-zone stimulus and austerity measures failed to convince skeptical markets that the currency bloc's problems are under control.

Fortunately for Treasury investors, all of this macroeconomic malaise added up to yet another banner week for safe-harbor government bonds. In Europe, yields on German two-year notes fell into negative territory, meaning investors are effectively paying the German government to borrow their money. On the home front, 10-year Treasury yields fell to 1.549%, from 1.648% last week, while yields on 30-year bonds fell to 2.663% from 2.755% last Friday.

The week's events fit into a recurring pattern that's become discouragingly familiar. At the first sign of a tepid economic indicator, skittish investors pile into Treasuries, further lowering bond yields. That flows into the mortgage market, aided by the Fed's efforts to suppress long-term rates through its Operation Twist program. Last week Freddie Mac said the average 30-year fixed-rate mortgage hit a brand-new low of 3.62%, marking the 10th week of the past 11 in which mortgage rates have set or matched an historic low.

Yet despite recent signs of growth in the housing market, it lacks the strength to lead the U.S. economic recovery in the absence of employment gains. Similarly, despite some recent improvement in bank lending to businesses, large corporations remain awash in cash, with little marginal use for historically low borrowing rates. With every month that the headline employment figure disappoints, it perpetuates a cycle that effectively renders interest rates powerless as a tool to galvanize the economy. Hence the Fed remains on the sidelines, while all the rate-cutting by other central banks merely leaves investors expecting more—or concluding the banks have spent their firepower.

Bond investors, meanwhile, are stuck with paltry, range-bound yields. "People don't want to buy," wrote David Ader and Ian Lyngen, government-bond strategists at CRT Capital Group, which had surveyed investors asking what they would do in the event the Treasuries market moved higher following Friday's employment report. "The answer was striking. Here we found 0% willing to buy. Zero. We've never seen that before in the long history of this survey, and the point is that no one saw a need or felt a desire to chase a rally."

Savvy fixed-income investors have been following the Fed's tacit advice to get out of Treasuries and park their money in riskier corporate bonds. Those at least offer investors a more substantial coupon to clip while they wait yet another month for some economic data that actually might engender some optimism.